Don't flee the market when uncertain times arise. Educate yourself on why staying invested is a smart move during market volatility with Fifth Third Bank.
The markets have been a veritable roller coast of performance throughout the current COVID-19 crisis. Over the last month, the Dow Jones Industrial Average has dropped from 25,000 to 18,500 and surged back up past 23,000. The changes can be hard to track—and even harder to stomach for investors with money in the market. It's no wonder that one in three people say they'd pull their money out of the market if and when it drops more than 10 percent.
But while the experience is less than pleasant, history suggests—and research confirms—that staying invested for the long term is often the smartest move. In previous market crashes and then recoveries, investors who kept their money in benefited from the climb back out. Meanwhile, those that pulled their assets out of the market risked missing the biggest recovery days. Their portfolios suffered for years to come.
For investors right now, the hardest thing to do is sit tight. But except for moves to protect your invested assets, staying put makes the most sense.
The Case for Staying In
While historical performance can't guarantee future results, it does offer helpful context during times of crisis. Whether you're contemplating pulling your money out of the market entirely or simply parking it in cash and trying to time a stock purchase, you might want to reconsider.
A recent study by Franklin Templeton modeled returns for hypothetical investors who kept their assets in a fully invested a stock portfolio—matched to the S&P 500—versus those who jumped in and out of the market. In one scenario, investors stayed in the market for 20 years up through the end of 2019. The investors earned an average annual return of just over 6%. Meanwhile, investors who pulled money out of the market—and inadvertently missed the 10 best recovery days over the same time period—earned an annual return of 2.44%
Unfortunately, the differences in performance only get worse. Investors who missed 20 of the best market days over the 20 years had an annual return of effectively zero. Those that missed 30 days and 40 days had returns of -1.95% and -3.82, according to the research. The big takeaway is that much of an investor's return depends on having their money in the market when it makes big moves. But few people can predict those moves in advance. Instead, those that do pull money out and attempt to reinvest risk doing so after the most significant recoveries already occurred.
A Historical Gut Check
Examining specific dips and recoveries over the past century can also provide a bit more peace-of-mind—and perhaps dissuade investors from making rash decisions. According to data from Morningstar, the market has had 16 downturns since the Great Depression; that is 16 instances in which it lost more than 10% of its value. The drops and recovery periods varied widely, suggesting again that timing a re-investment may be tough.
For instance, in the summer of 1990, the market declined 15% over five months. The declines stopped in October, and by February, the market had made a full recovery. In 1998, the market lost 15% of its value and regained all in the space of five months total. In these cases, the market quickly roared back. That's a relief to stressed investors of stress, but it can potentially catch them off guard if they thought the downturn would last longer.
In contrast, the research shows that other recoveries have lasted a year or far longer. The bottom fell out of the market in Sept. 2001 after the 9/11 terrorist attacks and declined 45% over the ensuing two years. The recovery? It lasted for almost four years. And in the previous 2008 recession, it took twice as long for the market to regain its losses as it took to drop—it took 16 months to bottom out and then 37 months to come back.
The point is that though the markets have historically recovered, it's hard to know when that will happen and how long it will take.
A Better Approach
This isn't to say that investors should be powerless during a volatile market. Instead, you should evaluate your moves in a broader context and keep your long-term goals in mind. Here are few ways to cope with a market rollercoaster, while staying on the ride:
Understand Your Long-Term Plan
Talk with your financial advisor about your long-term savings and investment goals and how your investment portfolio fits in. And review the amount of time you have until you need to draw on your assets, whether it's 10 years or more than 20 years.
Check Your Allocations
A diversified portfolio is the best way to weather market ups and downs. However, significant market moves can throw your portfolio out of whack from the asset allocations that you or your advisor have deemed best. Check your allocations now to see if they still make sense of your long-term goals.
Consider Dollar-Cost Averaging
While taking money out of the market isn't a great idea, continuous disciplined investing offers an effective way of dealing with volatility. With this strategy, you invest the same amount at regular intervals. Sometimes you're getting more stock for your money and sometimes less. But you will catch some deals when the market is down, and ensure you're in when it rises.
A bumpy stock market is no fun for anyone. But history shows that pulling your money fully out can do more harm than good. At a time when emotions run high, filter your investment decisions through a historical lens and a non-emotional, disciplined strategy that prioritizes your goals.